The system faces a financial shortfall, so will Washington step up?

Social Security isn’t broke and won’t go bankrupt. That said, a serious financial deficit looms for Social Security in the early 2030s. If history is any guide, however, odds are that nothing will be done to shore up Social Security’s finances until then. That’s hardly reassuring news for people now in their mid-40s to early-50s who hope to start claiming then.

The kick-the-can-down-the-road view is the inevitable conclusion from a talk I recently heard by Nobel laureate and MIT economist Peter Diamond at the Retirement Research Consortium meeting in Washington D.C. And the current political turmoil in the nation’s capital — including uncertainties over prospects for lifting the debt ceiling and funding the government after Labor Day — only reinforces Diamond’s judgment.

No Imminent Social Security Deadline, No Imminent Fix

The divide between conservatives and liberals over how to balance Social Security’s books is simply too wide to bridge without the pressure of an imminent deadline.

I find the lack of legislative action on bolstering Social Security’s finances a national disgrace. Yet, after listening to Diamond, perhaps delay isn’t the worst outcome.

I still prefer erasing the financing gap sooner rather than later. But more time lets supporters of Social Security convince voters that reducing benefits is the wrong approach — especially the conservatives’ proposal to raise the Full Retirement Age from 67 to 70. This takeaway is reinforced by Diamond’s analysis of the 1982-‘83 Greenspan Commission, the last successful effort to shore up Social Security.

Let me back up for a moment and set the scene.

The Social Security Solvency Outlook

The latest projections by Social Security actuaries predict the system’s retirement trust fund will run out of money in 2034. If Washington does nothing and allows that grim moment to pass, the system will have enough money coming in from payroll taxes to fund about three-quarters of scheduled benefits from then until 2090, which is hardly desirable (the actuaries make 75-year forecasts).

Put another way, Social Security confronts a 75-year financing shortfall equal to 0.9 percent of gross domestic product (GDP). It’s worth keeping in mind that defense outlays went down by 2.2 percent of GDP between 1990 and 2000 and up by 1.7 percent of GDP between 2000 and 2010, notes Alicia Munnell, director of the Center for Retirement Research at Boston College. In other words, the scale of the Social Security problem is manageable.

“The changes required to fix the system are well within the bounds of fluctuations in spending on other programs,” Munnell writes.

Of course, the politics of Social Security reform are contentious. Calls for action to improve the system’s long-term finances have repeatedly foundered on the shoals of ideology.

Conservatives routinely call for benefit cuts to close the financing gap. Liberals have fought to preserve benefits with Social Security payroll tax increases; their most popular idea is increasing or eliminating Social Security’s cap on taxing wages over $127,000.

There is no way around it, though. The only way to eliminate Social Security’s deficit is by putting more money into the system, cutting benefits or a combination of the two. And that’s why calls for emulating the 1982-83 bipartisan National Commission on Social Security Reform are routine.

What the Last Social Security Commission Did and Didn’t Do

The commission, better known as the Greenspan Commission because it was led by future Federal Reserve chairman Alan Greenspan, worked. Why not let history repeat itself?

Problem is, the popular image of the Greenspan Commission is revisionist history and the wrong lessons have been drawn from the episode.

At the time the Commission met, high inflation and high unemployment were pushing the system toward a short-term financial gap of $150 billion to $200 billion. The goal: ensuring Social Security could meet its obligations in the 1980s. Once into the 1990s, experts thought, the ranks of working boomers would grow and payroll taxes would exceed Social Security retirement benefits paid by a wide margin.

Republicans and Democrats deadlocked over how best to get over the funding gap. So Ronald Reagan’s administration appointed a 15-member commission to devise a solution.

The pressure was intense. The first Greenspan Commission meeting was in February, 1982 and without a solution Social Security checks wouldn’t go out to more than 36 million beneficiaries in July, 1983. Reagan signed into law Social Security fixes on April 20, 1983 with less than three months to spare.

Now you’re starting to understand Diamond’s view that the intense urgency of a deadline matters, not one nearly two decades into the future as we currently face.

Now for a reality check: The Greenspan Commission actually failed. Its members were hopelessly deadlocked. Social Security’s rescue was, in fact, driven by two political rivals: President Reagan and Rep. Tip O’Neil, the Democratic House speaker. They reluctantly had a handful of trusted proxies negotiate the final reform package. Bottom line: The politicians took over.

“The usual commission procedure was then turned on its head,” wrote Robert M. Ball in The Greenspan Commission: What Really Happened. “An agreement was negotiated between the principals by proxy and then the already agreed-to-result was taken back to the commission for its endorsement.”

Diamond’s talk drew on Ball’s fascinating 70-page recollection of the Greenspan Commission, a slim volume published in 2010 that was a chapter from Ball’s unpublished memoir. Ball, who died in 2008, served as Social Security commissioner under Presidents Kennedy, Johnson and Nixon and was a leading member of the Greenspan Commission (Tip O’Neil’s proxy).

Why The Greenspan Commission’s Fixes Came Undone

The negotiated changes to Social Security largely worked, at least for several decades, showing a small surplus for the system’s 75-year planning horizon. But subsequent changes in the U.S. economy have led to a new financing gap.

Among the more important shifts: stagnation in real wage growth. Rising income inequality has also undermined Social Security. For example, when the Greenspan Commission set the cap for taxable wages in 1983, 90 percent of wage income in America was covered, notes Dean Baker, economist and co-director of the Center for Economic and Policy Research. Today, the Social Security tax cap now only covers around 82 percent of wage income (meaning that there are far more wealthy people with income excluded). If the cap had continued to cover 90 percent of wage income, the projected Social Security shortfall would be roughly 40 percent less than it is now, Baker estimates.

A Fear About Another Social Security Commission

Ball’s memoir is a caution against turning to another commission to address Social Security’s projected funding shortfall. He worried that a commission might lead to a compromise ending with another hike in age of retirement (the legislation during Reagan’s administration pushed the age up from 65 to 67).

“I still see no merit in raising the retirement age,” Ball wrote. “I see it as having the effect of an across-the-board benefit cut without any redeeming features.”

Surveys routinely show that most Americans want to keep Social Security intact. They spurn benefit cuts by overwhelming majorities. The trick to avoiding them is to make the case over the next 17 years (hopefully less) that the best way to improve the financial underpinnings of Social Security doesn’t involve cuts.

Diamond closed his talk with these stirring sentences from President Franklin Roosevelt’s second inaugural address in 1937: “The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have little.”

That’s a case worth making, especially when it comes to assuring the retirement security of ordinary Americans.